Oil prices at lowest since June on soft demand worries

Brent and WTI at 6-month lows again as slowing demand worries outweigh Middle East supply risks

Oil prices retreated by more than 3% on Tuesday, relinquishing earlier gains, as concerns regarding excess supply and decelerating demand growth outweighed heightened supply risks in the Middle East following an attack on a Norwegian chemical tanker by the Iran-aligned Houthis.

Brent crude futures for February settled down $2.79, or 3.7%, to $73.24 a barrel, while U.S. West Texas Intermediate crude futures for January delivery slipped by $2.71, or 3.8%%, to $68.61.

Although the attack on the vessel helped oil to rally earlier in the day, "sentiment remains negative", said Tamas Varga of broker PVM Oil. The analyst added:

"There is no help coming from the demand side of the oil equation. The fundamental backdrop is discouraging."

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Oil demand: Markets concerned of potential slowdown in 2024

Markets are anticipating a slowdown in global oil demand growth in 2024, with OPEC and the International Energy Agency (IEA) split on the extent. Both OPEC and the IEA are scheduled to update their forecasts this week.

"Negative sentiment towards the oil complex is still overpowering at the moment," Kpler analyst Matt Smith told Reuters on Tuesday.

Prices have faced downward pressure due to weak demand and apprehensions that the OPEC+ deal to restrict supplies might not be sufficient to stabilize the market, Smith added. As part of the deal, OPEC+ has committed to limiting supplies by 2.2 million barrels per day in Q1 2024.

U.S. inflation: Core CPI rises by 0.3%, all eyes on Wednesday’s Fed meeting

Investors also adopted a cautious stance ahead of a critical U.S. inflation report and interest rate decision. The CPI release on Tuesday showed the headline U.S. yearly inflation rate slowing to 3.1% in November, down from the previous month's 3.2%, aligning with the lowest level recorded since early 2021.

The core rate — the reading that doesn’t include volatile food and fuel prices — rose 0.3% during November, with the year-on-year rate remaining unchanged at 4%. This figure remains twice as high as the Federal Reserve's target of 2%.

Michael Pearce, lead U.S. economist at Oxford Economics, commented on the data release:

“Overall, this [report] will do little to change the Fed’s recent communications that core inflation remains too strong to contemplate shifting to rate cuts any time soon.”

Omair Sharif, president of forecasting group Inflation Insights, told the Financial Times:

“The Fed keeps telling us they don’t have confidence that they can say with certainty that inflation is going to [its target of] 2 per cent anytime soon. I don’t think that confidence can be there after today’s numbers.”

The Federal Open Markets Committee's two-day policy meeting is set to conclude on Wednesday, with the U.S. central bank widely expected to keep the federal funds rate on hold in the 5.25%-5.50% range. The European Central Bank and the Bank of England will then announce their monetary policy decisions on Thursday.

Middle East: Houthis attack Norwegian tanker in Red Sea, escalating supply risk

The STRINDA, a commercial tanker, was struck with a rocket in the Red Sea on Tuesday, as per Houthi military spokesperson Yehia Sarea. The Houthis attacked the vessel as it was reportedly delivering crude oil to an Israeli terminal, and the crew allegedly ignored all warnings.

The attack marks the group’s latest protest against Israel’s bombardment of Gaza and escalates the risk of potential supply disruptions in the region.

The tanker’s owner, Norway's Mowinckel Chemical Tankers, said that the vessel was en route to Italy, carrying a cargo of palm oil intended for use in biofuels. The company's spokesperson told the Reuters news agency that there were no plans for the tanker to make a stop in Israel. Data from trade intelligence firm Kpler showed the STRINDA had loaded vegetable oil and biofuels in Malaysia and was headed for Venice.

Oil price forecast: EIA lowers Brent price projection for 2024

The U.S. Energy Information Administration (EIA) reduced its forecast for Brent crude in 2024 by $10 per barrel. The new projection suggests an average of $83 per barrel, compared to last month's estimate of $93 per barrel, as per the administration's monthly report.

Nevertheless, the EIA anticipates that supply reductions resulting from the OPEC+ agreement will contribute to an increase in Brent prices during the first half of 2024.

Investors’ attention has also been focused on the COP28 climate summit, where negotiators await a new draft deal following criticism of the previous version for being too weak, particularly in omitting a "phase-out" of fossil fuels.

At the time of writing on Tuesday, the price of the continuous contract for U.S. benchmark West Texas Intermediate crude has dropped by close to 12.4% over the past month. Brent crude futures have slid by 11.2% over the same period.

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